About Nick: i am an economist based in malaysia. I write about development economics, while sneaking in a pop culture reference or two.

The Incoherence of Blanket Policies in Malaysia

Published in The Edge Malaysia, July 2015.

I recently took a drive down to Segamat, Johor, to see my cousin’s son, who is also my godson, who turns five this year. While in Segamat, which is my parents’ hometown, my cousin drove me around, which was very kind of her and also very sympathetic of her given my serious lack of familiarity with the town of Segamat and its roads. Along the way, she had to refill her car with petrol. We stopped at a regular petrol station and she pumped RON95. I noticed that the price for RON95 in Segamat, a town much smaller and much less prosperous than the city of Kuala Lumpur, was RM2.05 – the same as the price for RON95 in Kuala Lumpur. How does this make sense?

The monthly configuration of petrol prices at the pump in Malaysia is an example of a blanket policy. Every single petrol station in Malaysia is subject to the price set by the Domestic Trade, Cooperatives and Consumerism Ministry (KPDNKK). However, petrol stations are located everywhere in the country, from rural areas to urban areas, from agriculture-based locations to services-based locations, from small towns to large cities. Unless every single district in Malaysia – I use district here because it is the lowest official delineation of government – has the same median income, it makes no sense for the price of petrol to be the same across every single district.

One possible solution – if a district-based price setting is too complicated and simply not feasible for the civil service – is a state-based price setting of petrol prices. That way, people who live in Kelantan – where the mean gross state product per capita was RM8,273 in 2010, based on Department of Statistics numbers – do not pay the same for petrol as people who live in Kuala Lumpur – where the mean gross state product per capita was RM55,951 in 2010. Certainly, there are other ways to gauge differentiating factors in petrol price setting besides mean income. One can also set petrol prices differently based on the different consumer price indices in the different states. If price levels are generally lower in Kelantan versus Kuala Lumpur, it stands to reason that petrol prices should follow suit. After all, no one is asking for prices of packets of nasi dagang in Kelantan and Kuala Lumpur to be equalized.

There are certainly complications to such a mechanism. For one, there is the question of the capacity of the federal and state governments in launching such a mechanism. Secondly, there is also likely to be some ‘cross-state-border’ issues. For instance, while it is unlikely that a car owner in Kuala Lumpur is going to drive to Kelantan just to get cheaper petrol, it is far more likely that a car owner in Penang is going to cross the border to Kedah just to get cheaper petrol. Of course, this is hugely dependent on how big the gulf is between the prices. One potential mitigating factor to this problem is that it is likely that those who are more price sensitive – those who have lower incomes – will be the ones making these treks. This can constitute a form of subsidy directly targeted to the poor. However, it is undeniable that there is a potential channel for abuse. Thirdly, it is also questionable whether the government is the best authority to determine petrol prices. Prices may be more fluid geographically over the long-run if a more market-based price determination system is allowed to flourish.

Another example of more blanket policy thinking in the Malaysian public sphere is the recent suggestion by Minister in the Prime Minister’s Department, Datuk Seri Shahidan Kassim, to impose a ban on 24 hour operations by mamak stall and hawker centers in housing and rural areas. The Minister claims that this proposal to restrict operation hours to midnight was in response to complaints that such outlets were the reason for the rise in social ills nationwide. While I think that that particular policy choice and those complaints are utterly ludicrous, there is another issue at hand – why should the federal government decide on how commercial places are to operate in particularly specific locales? Even Prime Minister Datuk Seri Najib Razak’s statement that the government will not impose a ban on 24 hour restaurants and eateries in residential and rural areas is part of the same issue – why is the decision to ban or not to ban a Federal decision?

I do not deny that there are some 24 hour eateries that could be disruptive to a neighborhood. Yet, I also believe that there are many 24 hour eateries that are part of a neighborhood’s culture and add value to the community. Why should these be banned as well? Thus, the decision on whether to restrict the operating hours on 24-hour eateries should be taken by the local government of that area, not the federal government. A local government can investigate more carefully the complaints raised by members of the community and even more so if that local government was elected by the local community, but that is a story for another day. Like a blanket petrol price, a blanket restriction at the federal level makes no sense for this issue as well.

To be clear, I am not suggesting that non-blanket policies are necessarily the optimal policy choice. Income tax policy is an example of a policy where blanket rules should apply. After all, one can easily imagine a rich individual who actually lives in Kuala Lumpur but buys a house in Kota Bharu and registers that as his official tax domain and enjoys the lower tax income rates that would prevail in Kota Bharu if non-blanket policies take place. In this case, a blanket income tax rate system is likely the optimal choice. This is also true of sin taxes such as taxes on cigarettes and alcohol, of legal systems and punishments, and of the content of the education system. What I am suggesting, however, is simply that the federal government consider the issue of geographic differentiation of policies, particularly in cases where different geographic locations have vastly different attributes. For instance, it may well be true that a 6% GST rate across the board is the optimal rate, but one can easily argue that some consideration for geographic differences due to attributes such as mean income or poverty rates must be taken into account. The thinking behind final policy decisions must be as flexible as possible to ensure that the policy itself is as welfare-enhancing as possible and as welfare-just as possible.

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